Gold Miner Dealmaking Picks Up, Boosting Prospects for Seabridge

Thursday, 21 Aug 2014 09:31 AM

 

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Seabridge Gold Inc. says the prospect of finding a partner for its $5 billion gold-copper project in British Columbia, one the world’s largest, has improved as mining dealmaking activity revives.

Seabridge intends to sell at least 51 percent of its Kerr-Sulphurets-Mitchell mine to a producer with the technical skills and financial muscle to build and run it, Chairman and Chief Executive Officer Rudi Fronk said in an interview.

“Right now the market is more constructive than it has been for the past two years,” Fronk said by phone. “You’re seeing M&A activity in the gold space again, whereas you really haven’t for the past several years.”

Gold-mining deals valued at $11.2 billion have been completed and proposed in 2014, the highest annual total in three years, according to data compiled by Bloomberg. Perhaps more significantly, a new pool of buyers is showing interest in KSM after Seabridge began announcing results from a high-grade copper section.

Big base-metals companies may be more likely to add new projects than their gold-focused counterparts because copper producers have a long-term, “generational” view, Fronk said.

“Copper is in a much stronger market right now than gold,” he said. That’s made copper producers, which have stronger balance sheets, more likely to take on projects the size of KSM, he said.

Confidentiality Agreements

KSM has reserves of 38.2 million ounces of gold and 9.89 billion pounds of copper, according to a March update on the company’s website. That makes it bigger than some of the world’s largest combined gold-copper projects, such as Barrick Gold Corp.’s Cerro Casale or Exeter Resource Corp.’s Caspiche, both in Chile.

Seabridge has entered into confidentiality agreements to share information with both gold and base-metals companies about investing in KSM, Fronk said. When pressed to be more specific, he said there are “more than five and less than 10” such agreements.

Fronk said there’s a third factor in KSM’s favor: Mining companies are growing more concerned about political risk, which makes Seabridge’s Canadian projects more attractive than those in some African and Asian countries.

Analysts appear to share Fronk’s optimism for Seabridge’s prospects. They are more bullish on the stock than any of the 400 biggest Canadian companies tracked by Bloomberg, as evidenced by the spread between average target prices and current share prices, according to the data.

Not Selling

The four analysts who follow Seabridge, all of whom recommend buying the stock, have an average target price of 33.54 Canadian dollars a share, according to data compiled by Bloomberg. That’s more than double the company’s closing price of C$12.26 on Wednesday, even after Seabridge climbed 53 percent in three months, the best performance on the 37-company S&P/TSX Global Gold Sector Index. The shares fell 2.1 percent to C$12 at 9:30 a.m. today.

Fronk, who has been looking for a partner for KSM for at least five years, says he’s not interested in an outright sale of the Vancouver-based company.

“This is an asset base that’s worth a lot more than what we’re trading at today,” Fronk said. “I seriously doubt our shareholder base is interested in selling out here at these share prices.”

Bigger Pool

Gold futures on the Comex in New York declined 1.4 percent to $1,277.10 an ounce, a two-month low, at 9:33 a.m. Thursday. The yellow metal is forecast to fall to an average of $1,254 next year and to $1,299 in 2016, according to data compiled by Bloomberg.

Raj Ray, a Toronto-based analyst at National Bank Financial, agrees with Fronk that the pool of potential partners for KSM has increased.

“The way the project was shaping up it looked more like a gold project, and there are not a lot of gold companies out there with either the financial resources at this point or the technical expertise,” Ray said in a phone interview last week.

That changed with the discovery of high-grade copper ore at KSM’s Deep Kerr deposit, he said.

“After they found the Deep Kerr deposit, now what happens is suddenly all these base-metals producers around the world, they come into play and they will be looking at the copper production out of this mine,” said Ray, naming Rio Tinto Group, Freeport-McMoRan Inc. and BHP Billiton Ltd. as potential partners.

More Reserves

Illtud Harri, a Rio spokesman, Freeport’s Eric Kinneberg and BHP’s Ruban Yogarajah declined to comment when contacted by e-mail yesterday.

Including reserves from the Courageous Lake project in Canada’s Northwest Territories, Seabridge’s total gold reserves were 44.7 million ounces.

That means it has more reserves than some of its largest rivals. By comparison, Kinross Gold Corp., the third-largest Canadian gold miner by revenue, had reserves of 42.8 million ounces at the end of 2013, according to the company’s website. Eldorado Gold Corp., the seventh-largest in Canada, had 27.7 million, the company said.

Fronk said he doesn’t expect significant implications for KSM from the mine-waste spill this month at Imperial Metals Corp.’s Mount Polley mine, also in British Columbia.

Environmental Approval

KSM received environmental approval from British Columbia earlier this month and federal officials have also concluded the mine isn’t likely to have negative effects on the environment, Fronk said. The company is still waiting for final federal approval, which it expects in the next few months.

Ray said that despite the changing mining M&A picture, there’s no certainty that Seabridge will find a joint-venture partner by next year.

“The prospects are brighter, but you can’t say for sure,” he said.

While Seabridge hopes to find a partner by the end of the first quarter, it’s going to wait for the right deal, Fronk said. The project won’t move forward without a partner, he said.

“There’s no more than 10 companies in the world that really can do this properly,” Fronk said. “We definitely are not one of them."

© Copyright 2014 Bloomberg News. All rights reserved.

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